The Rise and Fall of SPACs
A look into SPACs
SPACs (Special Purpose Acquisition Company) are shell companies, or blank check companies that raise capital in an IPO and use the cash to merge with a private company in order to take it public. SPAC activity experienced rapid growth throughout 2021, roughly 300 blank-check companies raising nearly $88 billion and 3,021 listings raising $601.2 billion, valuing the newly floated companies at $2.7 trillion, making the year-on-year increase from 2020 at 88% in volume and 87% by value. Despite such a blow out year, both SPAC IPOs and mergers have certainly slowed down towards the end of 2021 and beginning of 2022. Currently, the volume of public offerings through SPACs has sharply abated to the lowest level in two years; Q1 2022 only experienced 66 fresh mergers completed, a 35.6% plunge since the beginning of 2022 relative to the S&P 500’s 10.6% decline, and at least six mergers have been canceled thus far in 2022- a record number for deals nixed in a single quarter, including deals between Carlyle-backed Syniverse Technologies and M3-Brigade Acquisition II Corp., and between Acorns Grow and Pioneer Merger Corp.
There are a number of reasons to account for such a decline, a principal one being the increased scrutiny from the Securities and Exchange Commission (SEC) and other regulatory agencies as well, with growing concerns that there are insufficient shareholder protections as compared to traditional IPOs. The SEC will particularly continue to slow down new SPAC issuance activity having only recently published regulations imposing additional disclosure requirements and increasing potential liability for SPACs. Such regulations designed to align the regulation of SPACs more closely with that of traditional IPOs, including new disclosure and financial statement requirements, and expansion of underwriter liability, will certainly have an impact on making SPACs less attractive as an alternative than they have been, by increasing timing and cost, expanding potential liability for financial advisors, and decreasing opportunities for very early-stage companies to go public.
General market volatility and uncertain macroeconomic outlook may also explain this development, certainly seen in how ‘DeSpac-ed’ firms have also been hammered by recent routes on public markets sparked by soaring inflation and Russia’s invasion of Ukraine. The impending hikes on interest rates as inflation continues to rise certainly has its impacts on devaluing SPACs through causing rising bond yields and a great transition from growth to value stocks, with insiders beginning to sell off their shares and most companies that went public via SPAC turned out to be disappointing for investors, the vast majority of SPACs plummeting in price.
Finally, one might argue that the manic growth in SPACs in 2021 was unsustainable to begin with, and that the decline we are seeing today is actually natural. This is supported by the extensive concerns last year over the longevity of their growth, the then-predicted boom and bust clearly being represented today. It will certainly be interesting to see whether the slow down will continue this year due to market turbulence and increased regulations, or if the manic market experienced in 2020 and 2021 was truly a case of unsustainable growth.
By June-Seo Chung